U.S. monetary policy: a view from macro theory

William Gavin () and Benjamin Keen

No 2012-019, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We use a dynamic stochastic general equilibrium model to address two questions about U.S. monetary policy: 1) Can monetary policy elevate output when it is below potential? and 2) Is the zero lower bound a trap? The model answer to the first question is yes it can, but the effect is only temporary and probably not welfare enhancing. The answer to the second question is more complicated becasue it depends on policy. It also depends on whether it is the inflation rate or the real interest rate that will adjust over the longer run if the policy rate is held near zero for an extended period. We use the Fisher equation to analyze possible outcomes for situtations where the central bank has promised to keep the interest rate near zero for an extended period.

Keywords: Monetary policy; Econometric models (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Journal Article: U.S. Monetary Policy: A View from Macro Theory (2013)
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